Security Interest in Intellectual Property

Why it matters

For a software or biotech company, the IP is the company. Granting a lender a senior security interest in IP means that on default, the lender can force a sale of your codebase, your patents, your data, and your trademarks to recover their loan — typically at distress prices that don't even cover the loan amount, leaving equity holders with nothing. This is the exact mechanism that wiped out founders during the 2023 SVB receivership: companies with $3M of unsecured debt and $30M of equity-funded IP saw the IP seized and sold at fire-sale prices, returning a few cents on the dollar to the bank and zero to founders. The clause is often buried under 'Collateral' in the loan agreement and described by junior associates as 'standard for venture debt.' Standard does not mean acceptable.

How to negotiate

Demand an IP-carveout: the lender takes a security interest in everything EXCEPT the company's core IP (source code, registered patents, trademarks). Some venture debt providers (Hercules, Trinity Capital) will agree to this for stronger borrowers; others (most banks) will refuse. If they refuse, push for negative covenants only — the company agrees not to sell or transfer IP without lender consent, but the lender does not take a lien. If neither is acceptable to the lender, this loan is being priced for default, not for partnership.

Example language

How this clause typically appears in a debt agreement or note. Read it carefully — the language that triggers default is often buried in routine paragraphs.

As security for the Loan, Borrower hereby grants to Lender a continuing first-priority security interest in all of Borrower's assets, including without limitation all intellectual property (whether registered or unregistered), patents, trademarks, copyrights, trade secrets, source code, and proprietary technology, now owned or hereafter acquired.